Latest RBI Report Finds Merged Public Sector Banks Riskier

Bank merger is not a new thing in the banking and financial world. In India and different countries, such phenomenons occur from time to time. Bank merger is a process in which two or more different banks join their hands to form a new financial organization and start operating jointly under a new name and logo. When such a thing occurs, the new financial organization requests the existing customers of previous banks to update their banking details to receive or send money and conduct other banking activities.

There is a perception that bank mergers help financial organizations perform very well, increase their efficiency, reduce complicated and mind-blowing bureaucratic formalities in day-to-day operations, and offer banking services to many customers in the shortest possible time. But it seems that the recent merger of public sector banks in India did not go very well. The Reserve Bank of India has stated that merged public sector banks are riskier than unmerged ones. What prompted the central bank to issue such an alarming statement? What is remarkable in the report? Let’s analyze.

RBI’s Remark On The Merged Public Sector Bank

RBI’s observation says that public sector banks are riskier than unmerged ones. It used stock market indicators to evaluate systematic risk in the banking sector. Observed that overall risk in the banking sector fell short of its previous level during the first wave of the coronavirus pandemic. It also revealed that public sector banks have more systematic risks than private banks.

The Reserve Bank of India closely scrutinized the day returns of 32 major banks which covered around 90% of the banking sector assets and expressed its concern over the financial wellbeing of merged banks. RBI concluded that the capital levels of Indian banks would be higher than the prescribed minimum level of 9% in severe stress situations. The report indicated that system-level CRAR (capital-to-risk weighted assets ratio) might decrease to 15.4% by September 2022. Furthermore, the standard equity Tier 1 capital ratio will likely reach 12.5% by September 2022.  This report from the Reserve Bank of India indicates that merged banks need to pay more attention to the operational efficiency of daily banking activities.

A Brief Look At The Recent Merger Of Public Sector Banks

On August 30, 2019, finance minister Nirmala Sitharaman announced the merger of 10 public sector banks. Here are the details:

Serial Number	Name of Merged Organization	The Name of New Banking Organization	Total Asset Value After Merger (Approx)
1.	Oriental Bank of Commerce (OBC), United Bank of India (UBI), and Punjab National Bank	Punjab National Bank	₹ 17.95 lakh crore.
2.	Syndicate Bank & Canara Bank	Canara Bank	₹ 15.20 lakh crore
3.	Andhra Bank, Corporation Bank Union Bank of India.	Union Bank of India	₹ 14-59 lakh crore.
4.	Allahabad Bank and Indian Bank.	Indian Bank	₹8.08 lakh crores.

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Let’s Boost Your Knowledge: Why Do Banks Merge?

In India, public, private, and foreign banks operate and provide banking services to many individuals. In recent years, the demand for banking services has increased as more and more people are getting connected to the official banking ecosystem with each passing day.

Always keep in mind that, like any other organization, banks are commercial entities that need to generate revenues to survive in the market and pay salaries to their employees. When two banks think that their business model is no longer competitive and beneficial in the market, their CEOs start to talk about joining hands to form a new organization and work efficiently. When it comes to public sector banks, the government of India and the country’s central bank may instruct two or more financial organizations to merge and become a new bank after completing the merging process. What are the main benefits of bank mergers?

• Merger Helps Banks Reduce Operational Cost.

Operating a bank in a profitable mode is not an easy task at all. There was a time when many small banks were working in different parts of India with small shares in the market. Bank has to sell different financial products to generate additional funds to meet its various costs. When a bank fails to fulfill the expectations of its customers, doesn’t expand its business in new locations, and experiences continuous loss in different financial years, a merger with another bank is the only option to survive in the market and avoid a complete collapse of its business operations. After the merger, the new financial organization may close its regional offices and ATM centers which are no longer profitable from a business point of view. As per an RTI report, more than 3400 branches of public sector banks have been either closed or merged with the new financial organization in the last five years. It helps banks to reduce daily operational costs and save valuable resources.

• It Helps Small Banks To Prevent Total Collapse.

Contrary to the arguments of famous economists and financial experts, it wouldn’t be wrong to say that the Indian banking system is going through a survival crisis. In recent years, due to large-scale corruption, scams, and financial embezzlement, RBI has ordered many cooperative banks to shut down their operations entirely. Because of this administrative decision, account holders of those banks faced lots of troubles. It also triggered political controversy in the country. Due to covid-19, reduced economic activities, and other problems, it is believed that the total non-performing asset ratio of Indian banks is likely to increase from 7.8% to 9.80% in March 2022. So, whenever the Reserve Bank of India and the central government of the country thinks that a particular financial organization is no longer able to perform its core activities and service customers, they reserve the right to order two or more banks to join hands to save the total fall of small banks.

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• Bank Mergers Support Automation Drives

Nowadays, different banks in India use the latest IT tools and technologies to interact with customers and offer banking services to them in the shortest possible time. The rapid introduction of the latest technological innovation in the banking sector has triggered bank mergers. All leading banks want to reduce the cost of maintaining banking professionals as much as possible and maintain financial efficiency. After bank mergers, many working professionals are asked to leave. A good automation tool can perform the work of several banking professionals without making silly mistakes. Programmed automated tools can answer frequently asked questions, display financial records of credit borrowers in a few seconds, trace suspicious transactions, and reduce the requirement of human labor in day-to-day banking operations.

• Large Banks Can Easily Survive Global Competition

Competition in the banking sector continues to increase by leaps and bounds with every passing year. Globalization has enabled banks to go beyond their native geographical locations and open branches in different countries. Different foreign banks offer a wide range of banking solutions to many individuals in India. Many more foreign banks will open their branches in India to serve the banking needs of 1.3 billion people and gain immense profit by selling different loan products to individuals. Small banks find it difficult to make a place in the market and attract new customers. If two or more small banks join hands with each other, their assets, market share, and customer base are increased to a great extent. A big bank can comfortably face challenging situations and offer high-quality banking solutions to interested people.

• A Dramatic Improvement In Overall Work Culture

Many people disagree with this fact, but it’s a bitter truth. Public sector banks are infamous for their red-tapism, unnecessary bureaucratic procedures, and inefficiency. A merger is a solution to all these problems. When two banks join hands, it’s not just the amalgamation of two financial organizations. Working professionals with different work cultures meet, determine the course of daily banking activities, and try to offer the best banking services to all customers. As a result, the overall work culture is improved greatly.

• The New Bank Organization Can Make Higher Lending Decisions.

From time to time, business organizations, multinational companies, and startup firms demand a large amount of money as a loan. It is not easy for a small bank with limited cash liquidity to issue a large amount of money to borrowers. If they don’t repay the borrowed money (which is a quite common incident in India), the financial well-being of such banks deteriorates. Remember that the merged banks have larger assets and a better decision-making body. They can quickly verify the applications of numerous borrowers, determine their eligibility and creditworthiness, and make prudent lending decisions that help them get better returns.

• Banks Expansion Become Easier

India is a big country with 1.3 billion people, and its population continues to increase fast with each passing year. It is challenging for a small bank to open its offices and ATM centers in all significant cities and towns using its resources. After a merger, chief executive officers and banking professionals from small banks can access the infrastructure of more prominent financial organizations and expand their business in different parts of the country without facing any difficulty.

Disadvantages of Bank Mergers

Remember  that merging two various banking organizations is challenging. The difference in work culture, banking details, infrastructure, service area, and other factors create problems in bank mergers. Offices from both organizations hold several rounds of conversations to prepare the terms and conditions of the future union and determine various terms that will regulate the operating principle of the new banking organization. Here are some disadvantages of bank merger:

• Continuous Disturbance In Banking Services

When two banks communicate with each other about the possibility of an upcoming merger, it leads to the disruption in regular banking services like online transfer of money from one account to another, clearance of cheques, issuing new personal loans to customers, etc. When there is some improvement in the merger talk, professionals start creating new infrastructure for the new banking organization. Because of this reason, existing customers can face difficulties in conducting regular banking activities. If the conversation drags for several months, they will withdraw the money from their bank account and rush to other banks. In such a scenario, merged public sector banks lose many customers and business opportunities.

• The Possible Clash Between Working Professionals

When two banks join, their employees come on one page under the umbrella of a new banking organization and logo. However, it is challenging to coordinate working habits and risk assessment abilities of bank employees who worked in totally different work cultures in previous years.  As a result, classes might happen among employees while making crucial decisions. If the bank manager doesn’t address such issues with high priorities, regular quarrels among employees lead to the deterioration of the quality of overall banking services in the short and long term.

• Bank Mergers Don’t Guarantee The Success of A New Organisation

Regulatory authorities, government representatives, finance experts, and media organizations often highlight the benefits of bank mergers. But they forget to mention the simple fact that a new banking organization is not immune from possible failures and complete shutdown if it doesn’t change its course of action as per the demand of new customers. In the past, 90% of all mergers in the financial world have proved unsuccessful in India.

• Large Banks Have Significant Problems Too

Always keep in mind that large banks have a lot of problems. They can also collapse in unfavorable situations and cause financial problems in the national and international markets.  The American bank Lehman Brothers collapse on September 15, 2008, proves this point right. After its complete shutdown, a full-fledged global banking crisis triggered and caused an economic slump, which affected several countries across the globe.

Also Read: Indian Bank Balance Check Number

Conclusion

In India, the merger of banks is generally construed as an appropriate step in the banking sector. It helps banks expand their clout in the market, avert a possible shutdown soon, reduce operational costs, and boost financial discipline. But recent remarks from the reserve bank of India should open the eyes of top management in merged public sector banks. Their condition is much worse than unmerged banks.

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